EXPECTATIONS FOR THE INDUSTRY IN TODAY’S ECONOMIC CONTEXT 1
D IVERSIFIED INDUSTRIALS
Steel Sector Outlook
Expectations for the industry in today’s
economic context
K PMG INTERNATIONAL
2 STEEL SECTOR OUTLOOK
Following a massive global economic
downturn, the steel industry is preparing
for strong growth in 2010 and beyond. The
industry’s main challenge now is to meet
increased demand while maintaining profit
margins in the face of rising input costs.
With the right strategies and processes,
steel producers and distributors can better
position themselves for today’s rapidly
expanding global markets.
Foreword
Two years ago, the steel industry was reeling from the sharpest economic
contraction in over 75 years. By mid-2009, world steel output had declined
by percent compared with the first half of Plant shutdowns and
bankruptcies were not uncommon, and mitigating financial risk meant
liquidating inventories.
The pace of contraction in steel production began to slow by the second quarter
of 2009, and by 2010 output was returning to levels not seen since 2008.
However, the speed of recovery has created problems of its own. Companies
that reduced capacity and lowered their inventory levels during the global
recession are now struggling to fill customer orders. At the same time, prices
for iron ore, coal, and energy are rising, and this trend is expected to continue.
We can begin to build a comprehensive picture of the current and future state
of the global steel industry by tracking and analyzing key indicators such as steel
production and capacity levels, steel pricing, the state of merger and acquisition
(M&A) activities, input prices, and new approaches to demand forecasting and
supply chain management.
Mark Barrus
Global Head of Metals
1 June 2009 Crude Steel Production, World Steel Association.
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
EXPECTATIONS FOR THE INDUSTRY IN TODAY’S ECONOMIC CONTEXT 3
World steel capacity utilization ratio
50%
60%
70%
80%
90%
100%
Jul Aug Sep
2008
2009 2010
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Source: World Steel Association
Steel production on the rise
The severity of the recent global recession is reflected by the sharp decline in steel
production worldwide between 2008 and 2009. Steel production dropped steadily
through 2008, reaching its lowest point in the last quarter of that year, which was
also the period when steel capacity utilization fell to percent. In 2009, the total
world crude steel output had dropped percent compared to
Early indications of a recovery began in the first quarter of 2009 when capacity
utilization began to By the second trimester of 2009, the world steel
capacity utilization rate had increased to approximately 75 percent. Total world
crude steel production has also shown relatively steady month-on-month
increases since April
2 World crude steel output decreases by –% in 2009, World Steel Association News, January 22, 2010
3 MEPS, quoted in Steel capacity utilisation – the worst is over, Steel Grips, July 16, 2009
4 September 2009 Crude Steel Production, World Steel Association News, October 23, 2009
Companies can take
greater advantage of today’s
changing environment by
finding new ways to operate
leaner, improving risk
management in their supply
chain, and developing new
strategies to forecast
demand more precisely.
— Mark Barrus
Global Head of Metals,
KPMG in the US
‘‘
’’
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
4 STEEL SECTOR OUTLOOK
World crude steel production: H2 2009, Year-over-Year
Jul - 09 Aug - 09 Sep - 09 Oct -09 Nov - 09 Dec - 09
0
Source: World Steel Association
World crude steel production: Sept. 2008–Jan. 2010
Se
p
- 0
8
O
ct
-
08
N
ov
-
08
D
ec
-
08
Ja
n
- 0
9
Fe
b
- 0
9
M
ar
-
09
A
pr
-
09
M
ay
-
09
Ju
n
- 0
9
Ju
l -
0
9
A
ug
-
09
Se
p
- 0
9
O
ct
-
09
N
ov
-
09
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ec
-
09
Ja
n
- 1
0
0
25
50
75
m
ill
io
n
m
et
ric
to
ns
100
125
39
.4
36
.3
34
.4
86
.5
52
.1
37
.7
81
.7
44
.1
41
.2
86
.8
45
.6
40
.4
84
.7
44
.3
45
.1
92
.1
47
.0
43
.4
89
.0
45
.6
46
.5
95
.9
49
.4
49
.4
99
.7
50
.2
50
.7
10
3.
9
53
.2
10
6.
5
52
.3
54
.2
50
.7
10
8.
8
58
.1
51
.7
11
3.
4
61
.7
47
.3
10
7.
1
59
.8
47
.7
10
7.
0
59
.3
48
.7
10
9.
2
60
.5
99
.2
62
.9
10
7.
7
68
.3
China
World
Source: World Steel Association
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
EXPECTATIONS FOR THE INDUSTRY IN TODAY’S ECONOMIC CONTEXT 5
The global steel industry appears to be solidly in growth mode. On March 22,
2010, the World Steel Association reported that world crude steel production had
increased percent in February over the same month in The outlook
is positive worldwide. As we can see from the following table, this increase in
global production is not confined to any particular country or region. The same
report noted that the world crude steel capacity utilization ratio in February 2010
had climbed to percent, the highest in 15
Global steel production: February 2010 over February 2009
Country Production (Million Metric Tons) Increase Year-over-Year
China %
Japan 54%
US 51%
South Korea 25%
Germany %
Brazil %
Italy %
Spain %
Australia .5 %
Source: World Steel Association
5 February 2010 crude steel production, Steel Grips, March 22, 2010
6 Ibid.
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
6 STEEL SECTOR OUTLOOK
7 European steel demand to bounce 20% in 2010 – WSA, Reuters, March 8, 2010.
8 New road funds to help lift India steel demand, Reuters, March 3, 2010
9 World carbon price increase again in July, Steel Grips, August 3, 2009.
10 Steel Prices to Gain on Low Inventories, Costs, Baoshan Says, Bloomberg BusinessWeek, March 25, 2010.
A balancing act: supply and demand
Against low inventory levels and increasing demand for steel products,
producers are faced with the challenge of accessing raw materials and
manufacturing finished products to keep pace with customer orders. In this
environment, it becomes more important than ever to have a flexible and
responsive supply chain to support the achievement of growth objectives.
As various steel-intensive industries continue to recover, this will become
increasingly critical to the success of steel businesses. According to Ian
Christmas, Director General of the World Steel Association, Brazil, Russia, India
and China, collectively the BRIC countries, will be significant steel consumers,
accounting for some 60 percent of the global steel demand this year,
compared to 58 percent in 2009 and 50 percent in
As an example of this, in its 2011 federal budget, India has allocated trillion
rupees to infrastructure development, a move that will “spur on steel demand,”
says Indian Steel Secretary Atul
Getting to the bottom line: input costs and their
effect on prices
Perhaps the greatest challenge facing steel producers and distributors is a sharp
increase in costs for ore and coal that have not yet been matched by price
increases for customers.
Steel prices have seen a gradual turnaround since the middle of 2009 when
world steel prices rose for the first time in 11 Since that time, price
levels remained relatively steady in the first quarter of 2010, but as steel
producers run down already low inventory levels and have to absorb rising
input costs, prices are expected to These rising input costs can be
attributed to the increased global demand for commodities, the capital
investments required to access increasingly hard-to-reach commodities, and
rising energy costs, among other factors.
Global composite carbon steel prices (US$/tons)
Se
p
- 0
8
O
ct
-
08
N
ov
-
08
D
ec
-
08
Ja
n
- 0
9
Fe
b
- 0
9
M
ar
-
09
A
pr
-
09
M
ay
-
09
Ju
n
- 0
9
Ju
l -
0
9
A
ug
-
09
Ju
l -
0
8
A
ug
-
08
Se
p
- 0
9
O
ct
-
09
N
ov
-
09
D
ec
-
09
Ja
n
- 1
0
Fe
b
- 1
00
200
400
600
800
1000
1200
1400
Source: World Steel Association
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
EXPECTATIONS FOR THE INDUSTRY IN TODAY’S ECONOMIC CONTEXT 7
11 China facing huge iron ore benchmark hike – Wuhan Steel, Reuters, March 7, 2010.
12 Macquarie sees Chinese coal price rising further in 2010, Steel Guru, March 16, 2010
Steel producers in China, for example, are concerned about iron ore price hikes
demanded by international mining companies, and the producers have asked the
government for changes to the import licensing Coking coal prices are
expected by some analysts to rise to US$200/tonne, placing additional pressures
on margins such that, as noted above, prices begin to reflect input costs and start
to rise This spread in metals pricing due to higher input costs and
the limitations to passing along finished product price increases to consumers in
a still weak global economy are critical issues for steelmakers.
Iron ore fines (62 percent iron) prices in US$/tons
N
ov
-
08
Ja
n
- 0
9
M
ar
-
09
M
ay
-
09
Ju
l -
0
9
Se
p
- 0
9
N
ov
-
09
Ja
n
- 1
0
M
ar
-
10
U
S$
p
er
to
nn
e
0
20
40
60
80
100
120
140
160
Source: Steelmaking Commodity Prices, , accessed on March 29, 2010
Source: Steelmaking Commodity Prices, , accessed on March 29, 2010
Coking coal prices in US$/tons
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009
U
S$
p
er
to
nn
e
0
20
40
60
80
100
120
140
160
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
8 STEEL SECTOR OUTLOOK
Growth prospects: M&A activity
In the context of a recovering economy, increasing demand and a more productive
steel industry, merger and acquisition (M&A) activity is a given. The Central Asia/
Asia-Pacific region remains a major focus for deal activity, with China now the
leading China’s leadership recognizes that the domestic metals industry
is still characterized by the prevalence of old, inefficient companies run by
individual, provincial governments. The national government is, therefore,
encouraging consolidation of these companies as a way to both increase
efficiency and help meet China’s huge demand for steel products.
In 2009, China imported million tons of iron ore, raising the country’s
reliance on imported ore to percent of its To help alleviate that
dependency, Chinese companies are looking overseas for acquisitions that will
ensure a more reliable supply of raw materials.
As an example, Chinese industry leaders such as Wuhan Iron & Steel and
Shanghai Baosteel Group have acquired or made significant investments in
Australian companies producing iron and In Brazil, the East China Mineral
Exploration and Development Bureau has agreed to buy the Itaminas iron ore
mine from its owner, Bernardo de
13 Race for rare metal–and China is winning, , July 17, 2009
14 China near-term steel demand high, growth low, China Daily, March 25, 2010
15 Australia Mining Report 1Q 2010, Business Monitor, January 2010. See also table, “China M&A activity (completed deals)”
16 China Snaps Up Brazilian Iron Ore Mine For $, , March 25, 2010
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
EXPECTATIONS FOR THE INDUSTRY IN TODAY’S ECONOMIC CONTEXT 9
Global M&A activity by geographical region
July 2008 – June 2009
June 2009 – March 2010
Americas including Brazil BRIC Europe
0
50
100
150
200
250
300
350
242
331
150
204 205
310
190
299
Source: Thomson SDC
Global M&A activity by geographical region
China M&A activity (completed deals)17
Acquirer name
Target company
– Raw material
producer/supplier
Headquarters of
target company
Transaction deal
in US$ million
Date of
announcement
Wuhan Iron & Steel
Group Corporation
(WISCO)
China Africa
Development-Iron
Mine
Liberia March 15, 2010
Shanghai Baosteel
Group Corporation
Aquila Resources
Ltd.
Australia August 28, 2009
Wuhan Iron & Steel
Co. Ltd.
MMX Sudeste
Mineracao SA
Brazil June 8, 2009
Wuhan Iron & Steel
Co. Ltd.
MMX Mineracao e
Metalicos SA
Brazil May 19, 2009
Wuhan Iron & Steel
Group Corporation
(WISCO)
Consolidated
Thompson Iron
Canada March 30, 2009
Lingyuan Iron &
Steel Co. Ltd.
Linggang Grp
Beipiao Baoguo
China October 15, 2008
Source: World Steel Association
M&A activity can also support wider change management and performance
improvement initiatives. One KPMG member firm client recently leveraged its
acquisitions to streamline business operations and find efficiencies in its supply
chain to generate substantial financial benefits:
• Overall plant capacity utilization increased by more than 20 percent
• Freight cost was reduced by over US$ million.
17 Thomson One Banker – Accessed on March 26, 2009
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
10 STEEL SECTOR OUTLOOK
Case study
How effective business integration can help enhance the supply chain
Recently, a major steel manufacturer acquired four industrial products and building
companies in order to gain stability and
efficiency across the entire supply
chain. Acquiring and integrating even
one of these companies would present
a challenge, but integrating four at the
same time introduced a new level of
complexity and management
requirements.
The manufacturer turned to KPMG
member firms for assistance with this
massive project. Working closely with
the steel manufacturer, KPMG profes-
sionals developed an integration pro-
gram governance structure and a
broad-ranging plan for the effective
integration of the new assets into the
existing operations. KPMG also helped
analyze projected demand to help
ensure that the new organizational
structure put the right resources in the
right places at the right times to meet
customer needs. This comprehensive
approach helped enhance the syner-
gies between the business entities
during the integration to generate
value for the steel manufacturer.
The project implementation was
designed around a comprehensive
pre- to post-close integration plan and
was divided into three carefully
structured phases:
• Phase One began with preparatory
planning and analysis to gain control
of the integration program, mobilize
the integration effort and develop
senior leadership alignment around
the goals of the project.
• Phase Two involved incorporat-
ing business cases by functional
group, establishing tracking tem-
plates to capture the benefits of
synergies and designing the future-
state operating model to help
control and stabilize the business
transitions.
• Phase Three supported ongoing inte-
gration implementation activities as
defined by the results from the pre-
ceding phases, as well as additional
requests from the manufacturer.
Key client benefits
Based on this comprehensive plan,
the manufacturer was able to
integrate the companies in an
efficient, well-coordinated manner that
leveraged the assets of the newly
acquired business units. Using KPMG-
tested tools and methodologies that
assisted in assessing and managing
business performance, this company
was able to meet or exceed its
original synergy targets. Through the
integration program, the steel
manufacturer also benefited from
substantial cost savings. It is
estimated that overall plant capacity
utilization increased by more than
20 percent and that freight cost was
reduced by over US$ million.
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
EXPECTATIONS FOR THE INDUSTRY IN TODAY’S ECONOMIC CONTEXT 11
New strategies for a new economy
Steel companies can develop or adopt a
number of approaches to take full
advantage of today’s opportunities and
better position themselves should the
progress of recovery slow or stall.
For example, companies can examine
and enhance their forecasting systems
to better anticipate product demand or
materials requirements. This will help
determine what products should be
produced where, when and in what
quantities to avoid having to carry high
inventories. Forecasting accuracy and
thoroughness can also be increased
through the implementation of
enterprise-level customer relationship
management (CRM) systems. These
systems can be used to develop a
global outlook on customer demand
that can help drive strategic planning
and development. CRM data can also
be integrated with financial information
such as debt maturities, liquidity levels
and cash-flow requirements to improve
balance-sheet flexibility and working
capital management for the company.
One of the key lessons being drawn
from the events of the last 18 months
has been to “expect the unexpected.” To
mitigate the impact of high oil prices,
sudden currency fluctuations, and work
stoppages due to economic, political and
environmental upheavals, suppliers and
manufacturers can develop strategic
‘‘
’’
Forecasting
systems can be used to
develop a global outlook
on customer demand
that can help drive
strategic planning
and development.
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
agreements or joint ventures that give
increased stability to both parties. In the
steel industry, access to raw materials
is the critical hub upon which business
continuity depends. Manufacturers can
seek financing — which is becoming
more readily available now — to acquire
key suppliers, thereby gaining improved
access to raw materials. Manufacturers
can also enhance materials planning,
purchasing and replenishment by
developing supply policies that stipulate
supply lead times, reliability, batch sizes
and supply source.
KPMG member firms can help steel
companies respond to rapid changes
in the global steel industry with
methodologies and services designed
to help reduce risks in terms of
financing, tax liabilities, supply chain
development, project management
and transitions to new products and
markets.
We also have the insight and leading
practices gained from our extensive
industry experience to help steel
companies identify new business
opportunities that may improve their
performance and overall
competitiveness.
For more information, contact your
local KPMG representative or visit
.
KPMG Global Metals contacts
Jeff Dobbs
Global Head of Diversified Industrials
KPMG in the US
Tel: +1 313 230 3460
jdobbs@
Mark Barrus
Global Head of Metals
KPMG in the US
Tel: + 1 216 875 8376
mbarrus@
Contacts
Australia
Kevin Leighton
Partner
KPMG in Australia
Tel: +61 (2) 9335 7644
kaleighton@
Brazil
Charles Krieck
Partner
KPMG in Brazil
Tel: +55 11 2183 3102
ckrieck@
Canada
David Zych
Partner
KPMG in Canada
Tel: +1 905 523 2233
dzych@
China
David Ko
Partner
KPMG in China
Tel: +86 28 8673 3866
@
Germany
Guenter Nunnenkamp
Partner
KPMG in Germany
Tel: +49 211 475 7416
gnunnenkamp@
Russia
Kirill Altukhov
Partner
KPMG in Russia
Tel: +7 (495) 937 29 62 Ext:10110
kaltukhov@
Spain
Eric Damotte
Partner
KPMG in Spain
Tel: +34 914 563 406
edamotte@
United Kingdom
Julian Thomas
Partner
KPMG in the UK
Tel: +44 20 7694 34 01
@
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
© 2010 KPMG International Cooperative (“KPMG Interna-
tional”), a Swiss entity. Member firms of the KPMG network of
independent firms are affiliated with KPMG International. KPMG
International provides no client services. No member firm has
any authority to obligate or bind KPMG International or any other
member firm vis-à-vis third parties, nor does KPMG International
have any such authority to obligate or bind any member firm.
All rights reserved.
KPMG and the KPMG logo are registered trademarks of
KPMG International Cooperative (“KPMG International”),
a Swiss entity.
Designed by Evalueserve
Publication name: Steel Sector Outlook
Publication number: 1005503
Publication date: June 2010
